The PRA has published Consultation Paper 5/18: Algorithmic trading (CP5/18).

CP5/18 is relevant to PRA regulated firms in scope of the Capital Requirements Regulation that engage in algorithmic trading and are already subject to the rules in the algorithmic trading part of the PRA rule book (firms).

In CP5/18 the PRA sets out for consultation its proposed expectations regarding firms’ governance and risk management of algorithmic trading. The PRA proposes to set out these expectations in a new Supervisory Statement on algorithmic trading, a draft of which is set out in the Appendix to CP5/18. The new Supervisory Statement will apply to all algorithmic trading activities of a firm including in respect of unregulated financial instruments such as spot foreign exchange.

The PRA expects that a firm that follows the proposed expectations would promote its own safety and soundness through having appropriate governance and risk management around algorithmic trading. The draft Supervisory Statement is structured around the following topics:

  • Governance: A firm’s governing body is expected to explicitly approve the governance framework for algorithmic trading and its management body should identify the relevant senior management function with responsibility for algorithmic trading;
  • Algorithmic approval process (by the firm): Firms should have a robust algorithm approval process and a minimum set of risk controls;
  • Testing and deployment: Algorithm testing should involve all relevant risk and control functions and be carried out at a frequency, and with a level of rigour, commensurate with the risks the firm could be exposed to;
  • Inventories and documentation: Firms should have and maintain algorithm and risk control inventories; and
  • Risk Management and Other System and Controls functions: These functions should understand and have oversight over the risks of algorithmic trading. Risk management should have the authority to challenge existing risk controls and impose additional risk controls on algorithmic trading where appropriate.

The deadline for comments on CP5/18 is 7 May 2018. The PRA proposes that once finalised the new Supervisory Statement will apply from 30 June 2018. This date aligns with the implementation of the European Banking Authority (EBA) revised guidelines on internal governance under the CRD IV and the joint EBA and European Securities and Markets Authority guidelines on the assessment of the suitability of members of the management body and key function holders under the CRD IV and MiFID II.

For non-EEA firms operating in the UK through a branch, the PRA will continue to follow the supervisory approach set out in Supervisory Statement 10/14: Supervising international banks: the PRA’s approach to branch supervision (SS10/14) and will continue  to consider the home regulator’s approach to internal governance and controls.  In Consultation Paper 29/17: International banks: the PRA’s approach to branch authorisation and supervision, the PRA proposed amendments to SS10/14 which included a specific expectation that third country branches will have appropriate risk management in place to support the critical functions they undertake, including managing risks stemming from algorithmic trading.

View PRA consults on a new supervisory statement on algorithmic trading , 12 February 2018